What Is the Principle of “Put-Call Parity” and How Does It Relate to a Synthetic Future?

Put-call parity is a fundamental concept in options pricing that states that a portfolio of a long European call and a short European put at the same strike and expiration must equal a forward contract (or future) on the same asset, plus the present value of the strike price. This relationship is enforced by arbitrage.

A synthetic future is a direct application of put-call parity, demonstrating that a specific combination of options can perfectly replicate the payoff of a futures contract.